Redundancies - Redundancy a costly risk

According to the British Chamber of Commerce, the UK economy is expected to shrink by 2.4% in 2009. Financial services will be one of the worst hit, with a further 34,000 financial services sector jobs likely to be lost this year. As many clients cut back on their insurance to make savings or even go into administration, some brokers may look at redundancies to reduce costs.

Redundancies should be a last resort. Michelle Thorpe, head of human resources at Broker Network, said that brokers need to keep the non-financial effects of redundancies in mind when looking for ways to cut costs. She remarked: "The loss of staff can be extremely detrimental to the continued performance of a company, as redundancies have an impact on those that are left behind. The broker may lose other experienced staff due to worrying over whether or not they will be next."

Mean cost

A recent survey by the Chartered Institute of Personnel and Development estimated average redundancy costs at £16,375; a significant part of this sum is made up from statutory payments. Any employee with two years' continuous service has rights to these payments calculated on age, length of service and weekly pay. From February, redundancy payments will rise to a maximum of £10,500.

On top of these costs are those of any employment tribunal to assess claims for unfair dismissal. An employee can claim unfair dismissal if they feel that they were unfairly selected for redundancy, not offered alternative work where it was available, or if their employer did not consult properly with an employees' representative, such as a trade union, and all the individuals affected.

Brokers are not immune from such claims. Stuart Reid, chief executive of Venture Preference, is subject to tribunal by Adrian Donno - previously marine manager at Layton Blackham - who claimed unfair dismissal by his former employer.

David Price, senior employment law consultant at Peninsula, said that employees are more likely to take their former employees to tribunal in times of economic uncertainty because they find it harder to find alternative employment. Price warned: "Redundancies are closely scrutinised by tribunals, so brokers have to be careful that they are not using redundancies as an excuse to get rid of staff they do not like. Standard tribunal awards stand at around £70,000, so mistakes can prove expensive. Brokers are under a heavy obligation to their staff."

Options

Price continued: "There is more of a risk for small business such as local brokers because they are less aware of the formal procedures that have to be adhered to. A broker manager can consult legal and employment advisers as regards their duties to their employees. Small and medium-sized enterprises can be scared of changing company benefits but brokers should strongly consider compromising and reducing these costs or looking to improve staff performance as an alternative to redundancies."

Graeme Trudgill, technical and corporate affairs executive at the British Insurance Brokers' Association, has a much more positive outlook. He said: "Despite challenges faced in the current economic environment, redundancies are not really proving a problem for brokers; they are extremely resilient by nature and, historically, many have flourished in times of economic uncertainty."

CIPD formula for the cost of redundancies

(nr) + (xh) + (xt) + ny (h + t) + wz (p - n) = cost of redundancies

- = number of people made redundant

r = redundancy payments

x = number of people subsequently hired

h = hiring costs

y = percentage quitting post redundancy

t = induction/training cost

y = percentage quitting post redundancy

w= average monthly staff salary

z = percentage reduction in output per worker caused by lower morale

p = number of people employed prior to redundancies.